GAO-03-953R 

United States General Accounting Office

Washington, DC 20548 

B-292474 

July 3, 2003 

The Honorable Richard C. Shelby 

Chairman 

The Honorable Paul S. Sarbanes 

Ranking Minority Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Michael G. Oxley 

Chairman 

The Honorable Barney Frank 

Ranking Minority Member 

Committee on Financial Services 

House of Representatives 

Subject: Securities and Exchange Commission: Certain Research and Development 

Companies

Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on a 

major rule promulgated by the Securities and Exchange Commission (Commission), 

entitled “Certain Research and Development Companies” (RIN: 3235-AI57). We 

received the rule on June 17, 2003. It was published in the Federal Register as a final 

rule on June 20, 2003. 68 Fed. Reg. 37046. 

The final rule under the Investment Company Act of 1940 provides a nonexclusive 

safe harbor from the definition of investment company for certain bona fide research 

and development companies (R&D companies). The rule allows R&D companies 

greater flexibility to raise and invest capital pending its use in research, 

development, and other operations and clarifies the extent to which a company 

relying on the rule may make investments in other companies pursuant to 

collaborative research and development arrangements. 

Enclosed is our assessment of the Commission’s compliance with the procedural 

steps required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the 

rule. Our review indicates that the Commission complied with the applicable 

requirements. 
Page 2 GAO-03-953R 

If you have any questions about this report, please contact James W. Vickers, 

Assistant General Counsel, at (202) 512-8210. The official responsible for GAO 

evaluation work relating to the subject matter of the rule is Thomas McCool, 

Managing Director, Financial Markets and Community Investment. Mr. McCool can 

be reached at (202) 512-8678. 

 signed 

Kathleen E. Wannisky 

Managing Associate General Counsel 

Enclosures 

cc: Jill M. Peterson 

Assistant Secretary 

Securities and Exchange 

 Commission 
GAO-03-953R 

ENCLOSURE 

ANALYSIS UNDER 5 U.S.C. § 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE 

ISSUED BY THE 

SECURITIES AND EXCHANGE COMMISSION 

ENTITLED 

"CERTAIN RESEARCH AND DEVELOPMENT COMPANIES" 

(RIN: 3235-AI57) 

(i) Cost-benefit analysis

The SEC estimates that if 500 companies rely on the rule, the cost would be $103,750 

based on one hour per company at a blended hourly rate. The benefits of the rule 

include allowing R&D companies to raise large amounts of capital in a more costeffective manner and to formulate more efficient asset allocations than is permitted 

under existing tests. 

If just 5 of the estimated 500 companies take advantage of the rule and raise an 

additional $20 million, the total effect on the economy will be $100 million. 

(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. §§ 603-605, 

607, and 609

The SEC prepared an Initial Regulatory Flexibility Analysis in connection with the 

proposed rule and a Final Regulatory Flexibility Analysis is summarized in the 

preamble to the final rule. The analysis concludes that although the rule could affect 

small entities, it is less burdensome than the prior alternative and therefore should 

minimize any impact upon, or cost to, small entities. 

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform 

Act of 1995, 2 U.S.C. §§ 1532-1535

As an independent regulatory agency, the SEC is not subject to title II of the 

Unfunded Mandates Reform Act of 1995. 

(iv) Other relevant information or requirements under acts and executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq. 

The final rule was issued using the notice and comment procedures found at 5 U.S.C. 

553. On December 3, 2002, the SEC published a Notice of Proposed Rulemaking in 

the Federal Register. 67 Fed. Reg. 71915. The SEC received six comments in 

response to the proposed rule and discusses the comments in the preamble to the 

final rule. 
Page 2 GAO-03-953R 

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520 

The final rule contains information collections that are subject to review by the 

Office of Management and Budget (OMB) under the Paperwork Review Act. OMB 

has approved the information collection and assigned OMB control number 3235-

0574, which expires March 31, 2006. 

Statutory authorization for the rule 

The final rule is promulgated under the authority contained in section 6(c) and 38(a) 

of the Investment Company Act of 1940 (15 U.S.C. 80a-6(c) and 80a-38(a)). 

Executive Order No. 12866 

As the rule is promulgated by an independent regulatory agency, it is not subject to 

the review requirements of the order.